Case study: Retirement income trade-offs in later retirement

At the moment, they’re living on a very modest income made up of $31,500 age pension and $20,000 from superannuation pensions per year. That’s been sufficient for their needs until recently because they’ve largely been staying at home and helping to look after their grandchildren. But now all the grandkids are in high school, they’d like to target a higher income going forward. Before looking at the opportunities to make changes, we can review what will happen if Jackie and Charles continue along their existing path. The graph on your screen is from TelstraSuper’s retirement calculator, and it’s a projection of the income that can be expected per year if If the couple continue living on $51,500 per year as they have been.

You can see that under this scenario, their income is expected to last until they are 99 and beyond. However, Jackie and Charles would prefer to have a higher retirement income. Using a goal of $76,500 per year, which is approximately the standard set for a comfortable retirement by Asfa, the tool indicates that their superannuation balances are likely to run out at around age 86.

Clearly, this isn’t ideal, but Jackie and Charles would really like to improve their income up to that level to enjoy more regular holidays and leisure activities while they’re still fit and well. They’re happy to explore some other options to improve their retirement savings. The first option is to sell their block of land and invest that money to generate more retirement income. If they do sell the land, there will some capital gains tax to pay, and we estimate, based on their personal situation, that would be approximately $24,000 if they owned the land jointly. Assuming the land was purchased for $200,000 initially, and that was done some years ago.

After that capital gains tax is paid, they’d have approximately $376,000 remaining from the sale that they could invest. That can’t be added to superannuation because people who are 75 five or more can’t make personal contributions to super apart from downsize the contributions from the sale of a property that was once their principal residence.

Investing outside super, the couple might consider a high dividend exchange-traded fund that focuses on providing a large amount of income rather than focusing on capital growth. A high dividend fund might pay approximately 5% per year in net dividends which would be $18,800 based on that lump sum investment. The dividends would also come with franking credits from Australian shares. Based on the current franking percentage of some of the popular Australian share high dividend exchange-traded funds, we estimate that would add an additional $3,500 in tax back because of franking credits. That would be additional income income on top of that $18,800.

There are some considerations here. Jackie and Charles would need to complete a tax return every year to get those ranking credits back. It would simply be compulsory for them to do tax returns because they would have sufficient taxable income to make that a requirement. That might not be administration that they want to do, or they may have to employ an accountant to help them with it, particularly as they age. They also would need to be comfortable to invest 100% of the savings that they have outside super into the share market, and the land won’t remain in their family any longer.

That’s not something that they are really looking to do. They’d like to retain the land in the family if possible so that future generations can continue camping there in the coming years. Jackie and Charles’s income position, if they proceed with option one, is that they would still have the same annual age pension of $31,500 per year, the same superannuation pensions of $20,000 per year, but additional income from their investment of $22,300. That would bring their total annual income to $73,800 per year, which is much closer to their income goal of $76,500. Because they haven’t changed their superannuation with their super balance should still last until 99 as before. Of course, their annual income can fluctuate, though, because dividends will change from year to year, and the capital that they’ve invested is also exposed to stock market fluctuations.

Option two is for Jackie and Charles to sell their family home and use the proceeds to purchase a less expensive property to live in. With the leftover money, they can make a downsize across contribution to superannuation. Anyone who’s 55 or more and hasn’t previously made a downsize or contribution can add up to $300,000 to superannuation from the sale of a property that was once their principal residence using that downsize and measure.

And unlike other personal contributions to super, there’s no upper age limit. So even though Jackie and Charles are aged 75 or more, they can still make downsize or contributions. They estimate that if they buy a modern apartment near their original home, they’d have around $400,000 left over that they could add to super or $200,000 each. That would allow them to increase the withdrawals from their superannuation pensions because of the higher balances, but it would reduce their age pension. And that’s because they would have more income and assets being assessed in Centrelink means tests. They would have higher superannuation balances because of the sale of their home.

The home is not assessed as an asset in Centrelink means tests, so converting that home into cash will impact their age pension payments. However, it means that the rural land can remain in the family and they can pass it on to their children through their will in future. It also means that they won’t need to complete annual tax returns because money invested in a superannuation pension is all tax-free. All of the investment returns and the regular payments that the couple receive from their pensions are completely tax-free and don’t need to be declared on a tax return.

The TelstraSuper Indicator suggests that if Jackie and Charles go ahead with their plan, they can expect their target income of $76,500 per year to last until approximately aged 94. That’s an improvement from age 86 if they don’t top up their superannuation and go ahead and withdraw that level of income. But it’s perhaps not as long lasting as you might expect. And part of that is because of the reduction in age pension, which means they have to draw more of their income needs from their own savings. In the first year, their age pension would reduce to below $5,000. And by the fifth year, it would still be $22,000 a year below the maximum payment rate.

This leads us to Jackie and Charles’ third option, which is to downsize their home and make the planned super contributions using the downsizer measure, but also give their rural block of land away immediately to their children to try and reduce the assets they have being assessed by Centrelink to calculate their age pension and improve their payment rate. Rate. If they go ahead and make that gift, they will have to pay the capital gains tax on the disposal of the land, which will be the same $24,000 we saw in our first option.

They can pay that tax from the proceeds of downsizing their home, and that will leave them $376,000 that they can add to super as downsize their contributions after they’ve paid that tax, or $188,000 each. The land value from their rural block will continue being assessed in the Assets test for five years under the gifting rules because the amount of the gift is larger than the limit of $10,000 per year. That means their age pension payment rate won’t improve initially, but after five years when the asset is no longer being assessed, their payments will go up.

The calculator indicates that with those slightly smaller downsizer contributions, Jack and Charles’s super balances would be expected to last until approximately age 93 if they meet that same income goal of $76,500 per year. That’s one less year than before. However, it doesn’t take into account that after five years, their age pension will increase, so they won’t have to draw as much from their superannuation pensions. If we look into the Balanced section of the tool, we can see that it’s estimating they’ll have a combined balance of around $307,000 in superannuation when they turn 85, and that asset stops being assessed. That’s around $154,000 each.

Based on those super balances and Charles and Jackie’s other assets of $20,000, they would have under the limit to receive the full rate of age pension once they turn 85 and the land is no longer being assessed. That full age pension is currently approximately $42,200 per year, so they’d need to draw $30,300 per year or $15,150 per person from their superannuation balances to meet their income goal.

The Moneysmart account-based pension calculator estimates that that level of income drawn from those balances would last approximately until the couple turn 97. Charles and Jackie are also aware that they might spend less as they age, so their income could last longer than the tool is calculating. Combined with the full rate of age pension, That will meet their income goal of $76,500 per year. Now, Jackie and Charles can review their options and decide which course they’d most like to take.

Option one, selling the land to invest means that they can meet their income goals until they are 99, but the land will no longer be in their family, and they’ll have to complete tax returns on an annual basis. Plus, they’ll have to be comfortable that those savings are invested in the share market.

Option two, to downsize their home and contribute to super means that they can meet their income goals until they are 94. The land will remain in their family and they can leave it to their children in their will free from capital gains tax as long as the children don’t later sell the property. It does mean that their age pension, though, will be significantly reduced.

Option three, to downsize the home, contribute to super, and immediately gift the land to their children means that they can meet their income goals until they’re 97, the land will remain in their family, and they’ll receive the full rate of age pension from age 85. They may also consider that level of assets could be favourable if they need to enter aged care because aged care fees are also means-tested in a similar way to the age pension.

It’s now up to Jack and Charles to choose the option that their most that they’re most comfortable with to meet their goals.